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Shock Versus Gradualism in Models of Rational Expectations: The Case of Trade Liberalization

Susan George and Leonardo Auernheimer

No 1997/122, IMF Working Papers from International Monetary Fund

Abstract: This paper provides a new argument for “shock” versus “gradualism” in the implementation of trade policies. In the simple context of a small open economy with rational expectations, we consider the comparative welfare effects of eliminating an import tariff either immediately as an unanticipated shock, or gradually over a preannounced length of time. The gradualist policy introduces a distortion in consumption-accumulation decisions and generates welfare costs. And if the gradual change is extended over “too long” a period, these costs may exceed the long-run benefits of liberalization.

Keywords: WP (search for similar items in EconPapers)
Pages: 20
Date: 1997-09-01
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